Updated: Feb 15
At the end of a recent financial wellness webinar, I offered attendees the opportunity to speak with me one-on-one. I enjoy speaking with people, helping them through a complex subject, and offering them ideas on how to gain peace of mind.
Jane took the opportunity to schedule a call with me. She wanted to confirm whether she would have enough money to live comfortably after retiring from the employee owned (ESOP) medical equipment manufacturing company she has worked at for 25 years. Jane shared her plans to rollover her ESOP to an IRA. And she had a 401k account with a healthy balance. We made a plan to create her retirement income projection. However, she really wanted to discuss what to do with her home equity.
“How does my home fit into my retirement plan?”
Generally your home is not considered to be a part of your retirement income plan. Practically speaking, you need a place to live, and unless your home is generating income, it is more likely to count as a personal asset.
So what if you are in the circumstance of having your home be a large part of your net worth and have minimal retirement savings? If you are inching closer to your retirement date and don’t want to push it back, you may need to to make some sacrifices. This article focuses on the topic of using equity in your home to meet your income needs or lower your expenses.
Here are 4 strategies you could consider if you needed to supplement your retirement budget or reduce maintenance so you can live your best retirement life.
1. Downsize and invest the proceeds.
My aunt and uncle recently sold their home in Florida, receiving $250,000 after the sale. They plan to use $25,000 as a down payment to purchase a townhome for $100,000, and then use another $25,000 for remodeling. The cost of their new home with mortgage, HOA fees, and taxes is estimated at $1,000 a month. This is far less than the $2,500 a month they were spending on their previous home. With the guidance of their trusted financial advisor, they plan to invest the remaining sale proceeds of $200,000 to generate an $800 a month income. This will offset monthly home expenses down to $200, which should easily be covered by their social security income.
Looking for additional advice on downsizing? Here are some tips on what to look for when you downsize.
1. Sell your home, invest the proceeds, and rent a low maintenance townhome.
A gentleman I know in Chicago had a greystone for 35 years. It had increased in value to $1.2 million. His mortgage was paid off. He sold the home a few years ago and received $1.1 million in proceeds. He was relieved to sell the home because it needed significant repairs. He split the proceeds with his ex-wife and invested $550,000 with his financial advisor. That money is generating $2,000 a month for him to supplement his retirement income. He moved to a brand new condo for $1,800 monthly rent and doesn’t have to worry about upkeep and maintenance.
3. Move to an inexpensive location.
Perhaps you live in a major city with high property and income taxes. Maybe you have dreamed of country living for a slower pace of life or to be closer to nature. Or, you long for the education and community benefits of a University town with public transportation such as Champaign-Urbana where the University of Illinois is located. There can be many entertainment, education and social benefits of university communities coupled with a lower cost of living.
4. Obtain a reverse mortgage.
A reverse mortgage pays you a monthly income. This is the opposite of a regular mortgage payment. A reverse mortgage is a special type of loan for homeowners who are over age 62. With a reverse mortgage you are adding to the debt on your home. Why would you want to do this? If you have significant equity in your home and limited income that doesn’t meet your living expenses, then obtaining a reverse mortgage may be your solution. Before you proceed, carefully evaluate whether the payments you receive will cover all of your expenses. It is very important to keep your home insured and your property taxes current with a reverse mortgage. This debt created by a reverse mortgage is repaid with a sale of your home upon your death.
The downside of a reverse mortgage is that there are closing costs which can be significant. However, if you want to stay in your home and use home equity for retirement expenses this is an avenue worth exploring.
Learn more about reverse mortgages on the Consumer Financial Protection Bureau website.
Before taking action: talk with a financial advisor for personalized advice.
There are pros and cons to each of the options above, from closing costs to the hassles of moving. If you haven’t saved as much as you wish you had for retirement, but own your home outright then you have some very good financial planning options. Before putting into action any of these options, talk with a financial advisor to get personalized advice.
Do you need help navigating the use of home equity for retirement income? If you have more than $2 million saved and need help from a wealth manager, the Peak Wealth Planning team can assist.
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About the Author
Peter Newman is a Chartered Financial Advisor (CFA) and president of Peak Wealth Planning. He works with individuals nationwide that have accumulated wealth through company stock, ESOP shares, real estate, or running a business. Peter applies his unique background to help clients achieve their specific goals and enjoy peace of mind.
Peak Wealth Planning provides concierge services to meet your wealth management needs. Services include: financial planning, investment management, esop diversification, retirement income, insurance, and estate planning advice. Peak Wealth Planning is a fee-based financial advisor based in Champaign, Illinois, and Fraser, Colorado.